OECD Economic Surveys : Germany 1968.

48 Pages·2.815 MB·English

by  OECD

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I. 2. b. 7.
I
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
^ORGANISATION DE COOPERATION ET DE OEVELOPPEMENT ECONOMIQOES
I
BASIC STATISTICS OF GERMANY (F.R.)
THE LAND
Area, 1966 (thousand km') 249 Major cities, June 1966
Agricultural area, 1966 (thousand km1) 140 Million
Forests, 1966 (thousand km*) 72 inhabitants
Berlin (West) 2.2
Hamburg 1.9
Munich 1.2
Cologne 0.9
Essen 0.7
Dusseldorf 0.7
Frankfort 0.7
Dortmund 0.7
THE PEOPLE
Population 1966 (thousand) 59638 Net immigration (annual average
No. ofinhabitantsperkm* 240 1964-1966) 251000
Net natural increase in population Labour force, total 1966 27082000
(annual average 1964-1966) 384000 Labour force in industry, 1966 13103000
per 1000 inhabitants 6.5
PRODUCTION
GNP 1966 (billions ofDM) 480.7 OriginofGDP, 1966(percent):
GNP per head 1966 (US S) 2015 Agriculture, forestry, fishery 4
Cross fixed investment (average 1964 Industry (incl. construction) 52
1966): Services 44
per cent ofGNP 26 Home food production as a percentage
per head (US J) 495 of total food availability (agricultural
year 1965-1966) 59
THE GOVERNMENT
Public consumption 1966 (per cent of Composition ofFederal Parliament
GNP) 15.7 Christian Democrats 245 seats
Generalgovernmentcurrentrevenue1966 Social Democrats 202
(per cent ofGNP) 37 Free Democrats 49
Publicdebt,1966(ratiotogeneralgovern¬ Last election: 19th Septembre 1965.
ment current revenue) 53 Next election: 1969.
LIVING STANDARDS
Calories per head, perday 1965-1966 2911 No.ofradiosetsend1966(per1000inha¬
Average gross hourly earnings ofmale bitants) 306
industrial workers, 1967 (DM) 4.99 No.oftelevisionactsend 1966(per 1000
No. ofpassengercars inuse, mid-1966 inhabitants) 213
(per 1000 inhabitants) 161 Public current expenditure on education
No. oftelephones end 1965 (per 1000 per head, 1966(US S) 31
inhabitants) 148
FOREIGN TRADE
Exports: Imports:
Exportsofgoodsandservice,aspercent Importsofgoodsandservicesaspercent
ofGNP(average 1964-1966) 21 of GNP (average 1964-1966) 20
Mainexports, 1967(percentoftotalmer¬ Mainimports,1967(percentoftotalmer¬
chandise exports): chandise imports):
Productsofagriculture,forestryandfish¬ Products of agriculture, forestry and
ing 1 fishing 19
Basicmaterialsandsemi-finishedgoods 32 Basic materials and semi-finished goods 39
Manufactured foods and tobacco 2 Manufactured foods and tobacco 9
Other consumer manufactures 10 Other consumer manufactures 12
Investment goods 53 Investment goods 17
Other exports 2 Other imports 5
Total 1ÔÔ Total 100
THE CURRENCY
Monetary unit: Deutsche Mark. CurrencyunitsperUSdollar 4.00
Note.FiguresincludetheSaarandWestBerlin.
ECONOMIC SURVEYS BY THE OECD
A R C H
R ÉF É R " ' :
DOC P;;:L:
RETOUR BUT
GERMANY
ORGANISATION FOR ECONOMIC CO-OPBRATTON AND DEVELOPMENT
The Organisationfor Economic Co-operation andDevel¬
opment was set up under a Convention signed in Paris on
14th December 1960 by the Member countries ofthe Organ¬
isationfor European Economic Co-operation and by Canada
and the United States. This Convention provides that the
OECD shallpromotepolicies designed:
to achieve the highest sustainable economic growth
and employment and a rising standard of living in
Member countries, while maintainingfinancial stabi¬
lity, and thus to contribute to the development ofthe
world economy;
to contribute tosoundeconomic expansion in Member
as well as non-member countries in the process of
economic development
to contribute to the expansion of world trade on a
multilateral, non-discriminatory basis in accordance
with internationalobligations.
The legalpersonality possessed by the Organisationfor
European Economic Co-operation continues in the OECD,
which came into being on 30th September 1961.
The members ofOECD are: Austria, Belgium, Canada,
Denmark, France, the Federal Republic ofGermany, Greece,
Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands,
Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States.
TheSocialist FederalRepublicof Yugoslaviais associated
in certain work of the OECD,particularly that of the Eco¬
nomic and Development Review Committee.
This document was approved
by the Economic and Development Review Committee
in April 1968.
CONTENTS
Introduction 5
I Policy of Demand Restraint and Recession 5
Monetary Policy 6
Budget Policy 8
II Policy of Demand Reflation and Recovery 10
Monetary Policy 11
Budget Policy 13
Recent Trends and Prospects 16
HT The Balance of Payments 25
Recent Trends 25
Outlook for 1968 27
Prospects and Policy Conclusions 29
Statistical Annex 33
TABLES
(a) In text
1 New Bond Market Issues 13
2 The Federal Budget on a National Account Basis 15
3 Government Gross Fixed Investment 16
4 Capacity Utilisation, Productivity, Labour Costs in
Manufacturing 19
5 Employment and Labour Market 20
6 Prices 20
7 The Capacity Slack 24
8 The Balance of Payment 26
(b) Statistical annex
A Gross National Product 35
B Distribution of National Income 35
C Employment and Labour Market 36
D Industrial Production, New Orders and Deliveries 37
E Wages and Prices 38
F The Federal Budget 39
G Money and Banking 40
H Merchandise Trade by Area 41
I Merchandise Trade by Commodity Groups 42
J The Balance of Payments 43
INTRODUCTION
Therecessionwhich had developedinthelatterpart of 1966 as aresult
of policies designed to check the previous overheating, had been largely
arrested by mid-1967. By the autumn the corrective action which the
authorities had, progressively, been applying led to a revival of domestic
demand. Output has been rising since then andthe employment situation
has improved, highly stable cost/price conditions have been maintained
but small inroads have been made, as yet, into the very large surplus on
the current balance of payments. The question is whether the recovery
will prove strong enough significantly to reduce under-utilization of capa¬
cityinthe currentyear, orwhetheritwill lose strength as the directimpact
of official stimulus diminishes.
The performance of economic policy in the period immediately pre¬
ceding the downturn ofthe economy, and in the early phase ofthe reces¬
sion, can now be assessed in the light of fuller information. In view of
its relevance to problems ofgeneral and continuing interest in the context
ofthe adjustmentprocess, this is discussed in Part I ofthe present Survey.
Part II considers the subsequent policy ofdemand reflation and the pros¬
pects for domestic demand and activity in the current year. Balance
of payments developments and prospects are reviewed in Part III.
I POLICY OF DEMAND RESTRAINT AND RECESSION
There were two main reasons why the policies to restrain the course
of demand in the years 1965-67 brought the economy into recession.
First, the authorities failed to arrive at a suitable policy mix. During
most of the period, monetary policy had to carry the whole burden of
demand restraint and, to this end, was applied with a severity that led to
a substantial fall in investment. Second, the problem of timing often
difficult to judge in such cases was misjudged in the latter phase of the
experience. Fiscal policy became restrictive at a time when monetary
policy had already led to pronounced recessionary tendencies, and the
general restriction of demand was reversed too late. With the inevitable
OECD Economic Surveys
time-lag between policy action and impact this meant that the recessionary
tendency persisted for roughly one year.
Thedownturnoftheeconomywasledbybusinessinvestment. Machi¬
nery and equipment expenditure lost strength during 1965, started falling
in early 1966 and, by the first half of 1967, was going down at an annual
rate of 20 per cent. Stock-building weakened for more than a year and
then gave way to net destocking in the course ofthe second half of 1966.
Construction activity, favoured by good weather in the first half of 1966,
fell offin the second half ofthe year and declined steeply during the fol¬
lowing half year. The foreign balance on goods and services improved
strongly on a seasonally adjusted basis from late 1965 onwards and partly
concealed the effect ofthe restrictive policies on output and activity. But
by the autumn of 1966, with government consumption also declining,
domestic demand as a whole was falling and the foreign balance was
incapable of preventing a decline in output and activity. The foreign
labour outflow started, unemployment and short-time working began to
spread, and the wage rise slowed down under the influence ofthe weak¬
ening labour market. Although household savings bore part of the
impact, private consumption stopped rising in the second half of 1966.
Monetary policy
The restrictive monetary policy dates back to the summer of 19641
when imbalances appeared to be developing. Prices began to rise faster
than previously, and the current account ofthe balance ofpayments turn¬
ed from surplus to deficit. Further tightening was effected in 1965 when,
partly as a result ofexpansive fiscal policy, new inflationary developments
were to be feared. This was followed up by important new measures of
monetary restriction in the early summer of 1966 and active relaxation
policy was postponed until the turn of the year.
Monetary policy turned out afar more effective instrument ofdemand
restraint than in earlier post-war periods primarily because it coincided
with rising balance of payments deficits and because special measures
were adopted to ward off capital inflows from abroad. The precipitous
decline in bank liquidity, which started in early 1964 and persisted until
mid-1966, produced a degree ofliquidity squeeze unkonwn since the early
'fifties.2 Credit costs in the capital market were strongly affected by
1 The measures taken in recent years are described in earlier Surveys.
2 DM 10i billion of bank liquidity was drained off during this period. The
banks' position changed from one ofexcess net reserves corresponding to 6.5 per cent
of deposits in January 1964 to one of borrowed net reserves equal to 0.7 per cent of
depositsinJune 1966. (Netreserves = moneymarketinvestmentsathomeandabroad
less indebtedness to the Central Bank.)
Germany
large net sales offoreign-held bonds in response to the announcement in
early 1964 of the withholding tax on non-residents, by the withdrawal
of banks from the securities markets and by a confidence crisis on the
part of the general public which, by the summer of 1966, brought bond
yields to apost-war peak and virtually paralysed newissue activity. Rates
on mortgages and non-negotiable promissory notes followed bond yields
closely and money market rates rose steeply. The cost of short- and
medium-term bank credit also seems to have risen substantially.1 Mone¬
tary policy had strong effects on the supply, as well as the price, of bank
credit. The expansion ofbank credit started to slow down in the second
half of 1965. From mid-1966 onwards, the commercial banks, the most
severely affected by the liquidity drain, substantially cut back their short-
and medium-term lending to enterprises.*
Another reason accounting for the strong impact monetary policy
had during this period lies in the fact that, for a number ofyears, impor¬
tant sectors of the economy had become increasingly dependent on bor¬
rowing. In the enterprise sector, self-financing had fallen from one half
of investment in the early 'fifties to only, a fifth by 1965.3 A similar
development took place in respect of the communes, which account for
two thirds of total public investment.
Moreover, the investment boom which faced the monetary authorities
seems to have been considerably less vigorous than those of earlier
post-war years. In manufacturing, there was no strong incentive to
extend capacity, for the business situation had not raised capacity utili¬
zation rates significantly and no big order backlogs had accumulated.
This held true also for the building industry which, indeed, hardly shared
at all in the upturn. The underlying trend in dwelling construction had
weakened with the progressive disappearance of the housing shortage
and less generous government aid.
Under these conditions monetary restraint is likely to influence invest¬
ment activity relatively strongly. Its effects in Germany were intensified
in May 1966 when, at a time when investment demand seems already to
1 Until April 1967 such rates were subject to aceiling tied to Bank rate. But it
was possible to raise them more sharply than Bank rate increases permitted because,
in many cases, short- and medium-term credits had previously been supplied at prefe¬
rential rates below the ceiling.
2 The fact that lending by other German banks and foreign banks continued to
grow in the autumn suggests that the change reflected commercial bank lending policy
rather than falling credit demand.
3 Undistributed profits, net ofdepreciation at replacement cost and taxes, in per
cent of net investment in physical assets. The figures relate to the enterprise sector
includingthe Federalrailway and postal services which haverun large deficitsinrecent
years.
OECD Economic Surveys
have been falling, bank rate was raised by one full percentage point with
accompanying cuts of rediscount lines. The increase of Bank rate was
considered partly as an adjustment of the rate to ruling market condi¬
tions. A second objective of the May measures was to check invest¬
ment demand which was judged too high. The basis for the apparently
widespread expectation of a reversal of restrictive monetary policy disap¬
peared and the commercial banks reduced their lending from the summer
on. These banks were at that time heavily dependent on the Central
Bank.
Budget policy
The policy mix deteriorated in the election year 1965. At a time
when monetary policy was seeking to restrain high and rising demand,
taxes were cut and the increase ofFederal spending was stepped up. The
expansive impact of the changes in Federal revenue and expenditure in
that year can be roughly estimated at 0.5 per cent of GNP, as against a
contractive effect corresponding to 0.3 per cent of GNP in the preceding
year.1 In 1966, on the other hand, there was a relative tightening of
budget policy when monetary policy had already had an important im¬
pact on home demand. The Federal budget stimulus was reduced to
0.3 per cent of GNP a calendar year estimate which conceals a growing
degree of budget restraint as the year went on. There was more than a
10 per cent reduction of new Federal orders for civil engineering works
in the second half of 1966 as compared with a year earlier, and a 20 per
cent fall in new buildingpermits for othertypes ofpublic building. Fede¬
ral orders for civil engineering fell sharply again in the early months of
1967 in response to new restrictive spending directives laid down by the
Federal government in the midst of the recession.2 They were accom-
1 Thebudgetimpacthasbeenestimatedasfollows. TotheincreaseofrealFede¬
raldomesticexpenditureongoodsandservicesandtransferstoothergovernmentautho¬
rities has been added theeffect ofthebudgetchanges on thepurchasingpowerbalance
ofthe household sector. This effect was estimated by applying a multiplier of 1.27 to
thesum ofthechangeinreal Federal domesticpurchasesofgoods andservicesplusthe
change in net deflated Federal transfers to households minus the change in deflated
taxes received from households. The multiplier used was derived from the marginal
consumption and the import ratios of households prevailing in the period 1955-1965.
Forfullerdiscussionofthemethodsusedseestudy byProfessorB. Hansenaccompany¬
ing the forthcoming report on fiscal policy by the OECD Group ofFiscal Experts.
2 These stipulated that spending by the Federal departments should be restricted
totheamountsappropriatedinthe 1966budget,orlesswherethe 1967budgetproposal
provided for lower amounts. Furthermore, certain types of spending were subjected
to a second ceiling (corresponding to 75 percent ofthe spending estimates provided in
the 1967 budgetproposal) andpaymentsunderanyitem inanymonthwerenotallowed
to exceed one-twelfth of the annual total foressen for the item. Except for above-
ground buildingfinanced out oftheordinarybudget, theplacing ofnewbuilding orders
requiredpriorconsentoftheMinisterofFinanceandnocontractsinvolvingexpenditure
obligations in future budget years could be entered into without special permission.